In a market dealing with external shocks, value investing is fast gaining popularity. The success of value investors like Warren Buffett underscores this. Buffett and his business partner, Charlie Munger, managed to register a 20.1% CAGR for Berkshire Hathaway from 1965 through 2021. This favorably compares with a 10.5% rise of the S&P 500 Index during the same period.
Several other stocks, which have surged significantly in the recent past, have shown the overwhelming success of this pure-play investment strategy. Here we discuss five such stocks- BorgWarner Inc. BWA, Univar Solutions Inc. UNVR, Marathon Petroleum MPC, Barclays PLC BCS and ModivCare MODV.
More on Value Investing
While searching for a suitable investment option, value investors with a varied risk appetite are unlikely to consider the price/earnings to growth (PEG) ratio among several other popular metrics like price/earnings (P/E), price/sales (P/S) or price/book value (P/B).
This is because they often find this ratio complicated, considering the limitations in calculating a stock’s future earnings growth potential. Yardsticks, such as dividend yield, P/E or P/B, are commonly used to single out stocks trading at a discount.
However, while not taking into account the growth potential of a stock, these ratios might end up convincing us to invest in stocks that are at a discount just because of their poor show. This might often lead to “value traps” — a situation when these value picks start to underperform over the long run as the temporary problems, which once pulled down the share price, turn out to be persistent.
In such a case, even if you buy a stock at less than its fair value, you might still end up paying more. And here comes the importance of this not-so-popular but crucial value investing metric, the PEG ratio.
The PEG ratio is defined as: (Price/ Earnings)/Earnings Growth Rate
A low PEG ratio is always better for value investors.
While P/E alone fails to identify a true value stock, PEG helps find the intrinsic value of a stock.
There are some drawbacks to using the PEG ratio. It doesn’t consider the very common situation of changing growth rates, such as the forecast of the first three years at a very high growth rate, followed by a sustainable but lower growth rate over the long term.
Hence, PEG-based investing can turn out to be even more rewarding if some other relevant parameters are also taken into consideration.
Here are some of the screening criteria for a winning strategy:
PEG Ratio less than X Industry Median
P/E Ratio (using F1) less than X Industry Median (for more accurate valuation purpose)
Zacks Rank of 1 (Strong Buy) or 2 (Buy) (Whether good market conditions or bad, stocks with a Zacks Rank #1 or 2 have a proven history of success.)
Market Capitalization greater than $1 Billion (This helps us to focus on companies that have strong liquidity.)
Average 20-Day Volume greater than 50,000 (A substantial trading volume ensures that the stock is easily tradable.)
Percentage Change F1 Earnings Estimate Revisions (4 Weeks) greater than 5% (Upward estimate revisions add to the optimism, suggesting further bullishness.)
Value Score of less than or equal to B: Our research shows that stocks with a Style Score of A or B, when combined with a Zacks Rank #1, 2 or 3 (Hold), offer the best upside potential.
Here are five out of the 19 stocks that qualified the screening:
BorgWarner: Michigan-based BorgWarner is a global leader in clean and efficient technology solutions required for combustion, hybrid and electric vehicles. Its products include four-wheel-drive and all-wheel-drive transfer cases (primarily for light trucks and sport utility vehicles or SUVs), as well as automatic transmission and timing chain systems.
BorgWarner has a long-term expected growth rate of 30.5%. BWA currently carries a Zacks Rank of 2 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Univar Solutions: Based in Downers Grove, IL, Univar Solutions is a global distributor of chemical and ingredients and specialty services provider. Univar’s specialized services include chemical waste removal and ancillary services, e-marketing or digital promotion of chemicals for its producers, on-site storage of chemicals for its customers, support services for pest control and agricultural industries.
Univar Solutions currently holds a Zacks Rank #2 and has a Value Score of A. UNVR also has an impressive five-year historical growth rate of 22%.
Marathon Petroleum: Findlay, OH-based Marathon Petroleum is a leading independent refiner, transporter and marketer of petroleum products.In October 2018, Marathon Oil completed the acquisition of its rival Andeavor in a $23.3 billion deal, thereby becoming the nationwide largest refining company by market capitalization. The company operates in two segments: Refining and Marketing and Pipeline Transportation.
Apart from a discounted PEG and P/E, MPC currently sports a Zacks Rank #1 and has a Value Score of A. Marathon Petroleum has a long-term expected growth rate of 23%.
Barclays: Headquartered in London, Barclays PLC is a major global banking and financial services company, with £1,589.2 billion ($1,930.2 billion) in total assets as of Jun 30, 2022.The company restructured its business lines into two divisions — Barclays UK and Barclays International.
Barclays has an impressive long-term expected growth rate of 30.6%. Barclays stock currently has a Value Score of B and carries a Zacks Rank of 2.
ModivCare: This is a technology-enabled healthcare services company, providing a suite of integrated supportive care solutions for public and private payors and patients. ModivCare offers non-emergency medical transportation services for Medicaid or Medicare-eligible members whose limited mobility or financial resources hinder their ability to access necessary healthcare and social services.
MODV currently sports a Zacks Rank #1 and has a Value Score of B. It also has an impressive five-year historical growth rate of 34.6%.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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Barclays PLC (BCS) : Free Stock Analysis Report
BorgWarner Inc. (BWA) : Free Stock Analysis Report
Marathon Petroleum Corporation (MPC) : Free Stock Analysis Report
Univar Solutions Inc. (UNVR) : Free Stock Analysis Report
ModivCare Inc. (MODV) : Free Stock Analysis Report
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